The increased discussion of the level of LSAP is actually the first step in turning the Fed back toward an interest rate target regime. Although pointed to as a speck on the Eurodollar Strip horizon, in the land of color coded packs, the market is exploring the possibility. As we argued when we first introduced IOER on Squawk Box during the crisis (go check the videos), we agreed with a quantitative regime but felt the "compass metric" the Fed was using (inflation/unemployment) was flawed. What came next was a constantly changing series of dates, metrics and "cost/benefit" analysis disguising a policy of "more and winging it."

Unlike the data flawed Taylor Rule (and the thought bubble Evans Rule), our Market Rule has proved much better at determining the tilt of policy AND its future course. The Market Rule still projects a NEUTRAL (i.e. neither easy nor tight) Fed Funds rate of virtually NIL at this time. Put another way, if free to set the rate the market would set it near 7bp. This equilibrium rate remained virtually unchanged during the recent 100+ bp rise in other market rates. (10-12 peak). The take away - that the Fed seems to grasp better than most- is that without LSAP policy would be NEUTRAL. This calibration is deemed unacceptable by the Board given the economic and fiscal backdrops.

The trick going forward is to walk the market back to a rates regime AND keep the calibration appropriate to the forecasts and risks. In other words, the Fed is upping forward guidance and rhetoric hoping to create an aura of accommodation. The reality is we would need to see our equilibrium Funds rate RISE and the Fed maintain the present rate for the calibration to be tilted "Easy" with no LSAP. Guess what? That is exactly what the Fed is attempting to engineer. Do not be fooled by charlatans shouting that if the Fed wants to "get things moving" they should raise the rate. We, in the market, will do that and the Fed will stay put (for a while).

If you want to track the rate yourself, take the 12 month LIBOR set and subtract 60bp (.67369 - .60 today)--that is the Funds Rate in neutrality . If that rate begins to rise and the Fed stays behind, as they promise they will, things will really heat up. The downside is that improperly calibrated rates regimes-like Greenspan's- can be 'too tight at 1.5% or" too loose" at 4.5% (the Maestro pulled off a rare double!) But that's a problem for later. For next week, the Fed remains committed to tip toe-ing the market through Regime Change.